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Sri Lanka policy rates unchanged, credit growing

ECONOMYNEXT – Sri Lanka is keeping policy interest rates unchanged despite, expanding domestic credit, rising prices in the non-trade sector and a falling currency, as it waited for recently imposed administrative controls to work, the Central Bank said.

Credit to the private sector by commercial banks had risen 21.3 percent in August 2015 from a year earlier, with 64.7 billion rupees in new loans being given. Broad money (defined as M2b) had grown 16.2 percent in August from a year earlier, also driven by credit to government.

Data on credit to government was not released with the monetary policy statement.

Analysts say the private sector is a net saver and credit to private borrowers does not usually generate excess demand ad it is the state, which is a net dis-saver that de-stabilizes the economy.

However the most dangerous is central bank credit or printed money, generated by the Central Bank that generate excess demand and imports out of line with inflows.

When the Central Bank buys Treasury bills and injects liquidity foreign reserve losses generated (if the currency is defended to protect the poor) or currency collapses happen.

Foreign reserves picked up to 6.8 billion US dollars in September from 6.4 billion US dollars in August following a 1.1 billion US dollar borrowing from the Reserve Bank of India, indicating continuing forex reserve haemorrhage.

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